Jonathan Clements's Blog, page 284
July 1, 2021
June’s Hits
WHAT GRABBED readers' attention last month? Here are the seven most popular articles published by HumbleDollar in June:
"Among the unhappy retirees I���ve talked to, most are bored," writes Joe Kesler. "That can usually be fixed.��Think about old interests you weren���t able to pursue in the past."
Dick Quinn considers himself thrifty. But even he balks at the frugality embraced by some followers of the financial independence/retire early (FIRE) movement.
Suppose you pay 1% in annual fund expenses and 1% for financial advice. How much would it cost you over a lifetime of investing? John Lim runs the numbers. They aren't pretty.
Even if U.S. stock market valuations only partially revert to the mean, investors may make just 3% a year over the next decade. John Lim explains the math���and looks at what investors ought to do.
How hard will your portfolio get hit in a market crash? How much can you safely spend in retirement? You can answer both questions��by calculating your spendable net worth. Tom Welsh explains how.
When should you claim Social Security? Should you prepay a mortgage? How much should you put in stocks? As Adam Grossman notes, the answers often hinge not on logic, but on our individual perspective.
Helping your elderly parents with financial, health and other issues? Drawing on his experience with his mom, dad and in-laws, Howard Rohleder��offers a comprehensive to-do list.
Meanwhile, last month's two most popular newsletters were Skimping on Cash and Life Cycle. What about our Voices questions? The two that garnered the most interest asked about the best strategy for generating retirement income and which funds you'd buy if you could purchase just three or less.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier��articles.
"Among the unhappy retirees I���ve talked to, most are bored," writes Joe Kesler. "That can usually be fixed.��Think about old interests you weren���t able to pursue in the past."
Dick Quinn considers himself thrifty. But even he balks at the frugality embraced by some followers of the financial independence/retire early (FIRE) movement.
Suppose you pay 1% in annual fund expenses and 1% for financial advice. How much would it cost you over a lifetime of investing? John Lim runs the numbers. They aren't pretty.
Even if U.S. stock market valuations only partially revert to the mean, investors may make just 3% a year over the next decade. John Lim explains the math���and looks at what investors ought to do.
How hard will your portfolio get hit in a market crash? How much can you safely spend in retirement? You can answer both questions��by calculating your spendable net worth. Tom Welsh explains how.
When should you claim Social Security? Should you prepay a mortgage? How much should you put in stocks? As Adam Grossman notes, the answers often hinge not on logic, but on our individual perspective.
Helping your elderly parents with financial, health and other issues? Drawing on his experience with his mom, dad and in-laws, Howard Rohleder��offers a comprehensive to-do list.
Meanwhile, last month's two most popular newsletters were Skimping on Cash and Life Cycle. What about our Voices questions? The two that garnered the most interest asked about the best strategy for generating retirement income and which funds you'd buy if you could purchase just three or less.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier��articles.The post June’s Hits appeared first on HumbleDollar.
June 30, 2021
Finding Merit
THERE���S NO SINGLE, right way to legally crack the college admissions and financial aid systems. It���s up to teenagers and their parents to do the necessary work.
Still, it helps to have a tour guide���which is what you get with The Price You Pay for College, the new book from New York Times financial journalist Ron Lieber. Lieber's book discusses why college costs so much, digs into the allure of elite schools, uncovers hacks that may not really be hacks, and talks about how to plan and pay for college.��Here are three key ideas that I took away from the book:
1. Families need to talk. Teenagers and their parents should discuss money, core values and priorities. That���ll help students identify what they want from their college experience.
Sprinkled throughout Lieber���s book are thought-provoking questions. For example, what���s your definition of success? What is college for? Is it about learning? Building connections? A means to a job? If a college education is a means to a job, at what price? What can the family afford? Where will the necessary money come from?
If the value of a college education to your family is a job, you might wonder just how important an elite school is for obtaining a more coveted position. Lieber���s research suggests it���s not as critical as you may imagine, with alumni from top schools obtaining between 13% and 58% of prestigious jobs, depending on the occupation. What���s apparent is the benefit of the doubt accorded to applicants who have the most selective schools on their resume. Certain gatekeepers have a vested interest in continually building and promoting their own networks, which can often start with their alma mater.
Lieber doesn���t pretend to have a formula that calculates the actual value of any given college experience. Instead, he encourages us to reflect on how our feelings influence such an important and expensive decision. In his decades of reporting, Lieber "has never come across a consumer decision that inspires more confusion and emotion than this one."
2. The devil is in the details. Once you outline what you���re looking for from the college experience, start digging for data. Lieber���s book offers resources to help uncover the data that does exist. One problem: The numbers aren���t standardized across schools and aren���t always easy to come by or interpret.
For example, mental health is becoming more top of mind for many families, with nearly a quarter of new undergraduates now classified as disabled, largely due to a mental health diagnosis such as depression or anxiety. Campus resources may be very important to these families, so it���s worth determining how long it takes to schedule an appointment for counseling, who the providers are and what type of support organizations are available.
The clearer you are on what success means for your child and family, and what value a college offers, the more you can cut through the clutter and eliminate details that aren���t a priority. In a decision that���s anything but easy, the more noise you can eliminate, the better.
3. The game has changed. It���s probably not that surprising���and yet still alarming���to learn that consultants play a big role behind the scenes. They help colleges to find students, to determine what to charge them and to prod families to follow through. Discounts to attract students are often offered in the form of merit aid.
It���s tough to understand the financial aid system, let alone predict how much merit aid you���ll receive���assuming, of course, you get in. Merit aid doesn���t consider your financial situation, like need-based financial aid does, so it���s entirely possible for wealthier families to be offered discounts, provided the student has what the college is looking for. Colleges use algorithms to predict what kind of discount is needed to get a particular student to say ���yes.��� This is all guided by consultants, who "help schools leverage information about your family to optimize your discount," Lieber writes.
He gives us valuable hints about how to uncover more about merit aid than the basic information listed on a school���s website, and it starts with a school���s Common Data Set. The easiest way to find this information is by Googling ���common data set��� and a college���s name. Among other items, look for the number of people who received merit aid, despite no financial need, and the range of test scores for admitted students. If your student���s scores rank high for a particular college, there���s a greater chance of merit aid. Schools claim their award-giving process is based on more than test scores and other data, and it likely is. Still, checking the numbers gives families a shot at determining how a college���s algorithm is likely to rank their prospective student.
Anika Hedstrom, MBA, CFP, is the co-founder of��Uplevel Wealth,��a boutique wealth management firm serving women and professional families. She writes on motivational and behavioral aspects of financial planning, and has been featured in The Wall Street Journal,��MarketWatch, Business Insider,��USA Today and NerdWallet.��An Oregon native, she loves the outdoors, good pinot and chasing after her young twins as they head in opposite directions.��Follow her on Twitter��@AnikaHedstrom��and check out her earlier articles.
Still, it helps to have a tour guide���which is what you get with The Price You Pay for College, the new book from New York Times financial journalist Ron Lieber. Lieber's book discusses why college costs so much, digs into the allure of elite schools, uncovers hacks that may not really be hacks, and talks about how to plan and pay for college.��Here are three key ideas that I took away from the book:
1. Families need to talk. Teenagers and their parents should discuss money, core values and priorities. That���ll help students identify what they want from their college experience.
Sprinkled throughout Lieber���s book are thought-provoking questions. For example, what���s your definition of success? What is college for? Is it about learning? Building connections? A means to a job? If a college education is a means to a job, at what price? What can the family afford? Where will the necessary money come from?
If the value of a college education to your family is a job, you might wonder just how important an elite school is for obtaining a more coveted position. Lieber���s research suggests it���s not as critical as you may imagine, with alumni from top schools obtaining between 13% and 58% of prestigious jobs, depending on the occupation. What���s apparent is the benefit of the doubt accorded to applicants who have the most selective schools on their resume. Certain gatekeepers have a vested interest in continually building and promoting their own networks, which can often start with their alma mater.
Lieber doesn���t pretend to have a formula that calculates the actual value of any given college experience. Instead, he encourages us to reflect on how our feelings influence such an important and expensive decision. In his decades of reporting, Lieber "has never come across a consumer decision that inspires more confusion and emotion than this one."
2. The devil is in the details. Once you outline what you���re looking for from the college experience, start digging for data. Lieber���s book offers resources to help uncover the data that does exist. One problem: The numbers aren���t standardized across schools and aren���t always easy to come by or interpret.
For example, mental health is becoming more top of mind for many families, with nearly a quarter of new undergraduates now classified as disabled, largely due to a mental health diagnosis such as depression or anxiety. Campus resources may be very important to these families, so it���s worth determining how long it takes to schedule an appointment for counseling, who the providers are and what type of support organizations are available.
The clearer you are on what success means for your child and family, and what value a college offers, the more you can cut through the clutter and eliminate details that aren���t a priority. In a decision that���s anything but easy, the more noise you can eliminate, the better.
3. The game has changed. It���s probably not that surprising���and yet still alarming���to learn that consultants play a big role behind the scenes. They help colleges to find students, to determine what to charge them and to prod families to follow through. Discounts to attract students are often offered in the form of merit aid.
It���s tough to understand the financial aid system, let alone predict how much merit aid you���ll receive���assuming, of course, you get in. Merit aid doesn���t consider your financial situation, like need-based financial aid does, so it���s entirely possible for wealthier families to be offered discounts, provided the student has what the college is looking for. Colleges use algorithms to predict what kind of discount is needed to get a particular student to say ���yes.��� This is all guided by consultants, who "help schools leverage information about your family to optimize your discount," Lieber writes.
He gives us valuable hints about how to uncover more about merit aid than the basic information listed on a school���s website, and it starts with a school���s Common Data Set. The easiest way to find this information is by Googling ���common data set��� and a college���s name. Among other items, look for the number of people who received merit aid, despite no financial need, and the range of test scores for admitted students. If your student���s scores rank high for a particular college, there���s a greater chance of merit aid. Schools claim their award-giving process is based on more than test scores and other data, and it likely is. Still, checking the numbers gives families a shot at determining how a college���s algorithm is likely to rank their prospective student.
Anika Hedstrom, MBA, CFP, is the co-founder of��Uplevel Wealth,��a boutique wealth management firm serving women and professional families. She writes on motivational and behavioral aspects of financial planning, and has been featured in The Wall Street Journal,��MarketWatch, Business Insider,��USA Today and NerdWallet.��An Oregon native, she loves the outdoors, good pinot and chasing after her young twins as they head in opposite directions.��Follow her on Twitter��@AnikaHedstrom��and check out her earlier articles.The post Finding Merit appeared first on HumbleDollar.
June 29, 2021
Calling for Backup
WHEN I RETIRED, I was surprised by how many of my friends and former colleagues had a financial advisor. My thought: Why would folks pay someone else to manage their money when they could easily do it themselves?
But I found out early in retirement that hiring an advisor was a good idea. There���s a big difference between investing while drawing a paycheck and investing without one. When I retired, I realized that the money I was investing was all the money I���d ever have, except for Social Security���and Social Security replaces just 40% of the average worker���s salary. With the stakes so high, I was hesitant to manage my own money.
When I turned age 67, I decided it was time to hire an advisor. I felt someone else could do a better job than me, not because the advisor would select better investments, but because he or she would be a more patient and less emotional investor.
I wasn���t looking to hire a full-service financial planner who would advise me on topics like estate planning and insurance. I���m pretty well set in those areas and I already have professionals helping me. Instead, I wanted an advisor who would create a plan for meeting my financial goals and help me manage my investments. Here are some things that were important to me when looking for a financial advisor:
After one advisor failed to turn up for our appointment, I realized how important it was to have someone who was dependable and trustworthy.
I wanted someone with reputable credentials, such as the Chartered Financial Analyst or Certified Financial Planner designation. In addition, the advisor couldn���t work on commission because that creates an incentive to push high-cost financial products.
I wanted my own dedicated financial advisor, with the ability to schedule an appointment when needed. I wasn���t willing to leave my investment portfolio in the hands of a robo-advisor, with no human interaction.
I wanted a portfolio designed specifically for my circumstances, needs and goals.
I wanted my portfolio built primarily with low-cost, broad-based index funds.
I wanted transparency, with the ability to go online and see up-to-date information on the total management fees incurred, my portfolio���s performance and the likelihood of meeting my financial goals.
I wanted excellent customer support not just from my financial advisor, but from the whole organization.
I didn���t want to pay for the initial investment plan. If I didn���t like the plan, I wanted to be able to walk away without incurring a fee.
Finally, I wasn���t willing to pay someone 1% of assets per year to manage my investments. It would have to be considerably less.
I decided to go with Vanguard Personal Advisor Services. I���ve been a Vanguard Group client for more than 35 years and felt comfortable with the people there managing my money. Since I already had most of my money with the firm, it was easy to swap over to the advisory service.
After three years, I���m happy with my portfolio���s performance and with the customer service. But in the back of my mind, I keep wondering whether I���d be better off in a Vanguard Target Retirement Fund that meets my desired asset allocation.
These funds offer a diversified, professionally managed portfolio���and the cost is just 0.12% to 0.15% a year. That���s less than half the cost of the advisory service, which is typically 0.3% a year plus the expenses of the underlying funds. Each target fund is made up of low-cost, broad-based index funds, similar to what my advisor-managed portfolio owns. It���s a type of fund you can literally forget about because it makes all the investment decisions. You don���t even have to keep tabs on your asset allocation because it rebalances for you.
How important is access to a financial advisor and having a personalized financial plan? Is it worth the added expense? So far, the answer is, ���yes.��� But those target retirement funds sure look tempting.
Dennis Friedman retired from Boeing Satellite Systems after a 30-year career in manufacturing. Born in Ohio, Dennis is a California transplant with a bachelor's degree in history and an MBA. A self-described "humble investor," he likes reading historical novels and about personal finance. Check out his earlier��articles��and follow him on Twitter @DMFrie.
But I found out early in retirement that hiring an advisor was a good idea. There���s a big difference between investing while drawing a paycheck and investing without one. When I retired, I realized that the money I was investing was all the money I���d ever have, except for Social Security���and Social Security replaces just 40% of the average worker���s salary. With the stakes so high, I was hesitant to manage my own money.
When I turned age 67, I decided it was time to hire an advisor. I felt someone else could do a better job than me, not because the advisor would select better investments, but because he or she would be a more patient and less emotional investor.
I wasn���t looking to hire a full-service financial planner who would advise me on topics like estate planning and insurance. I���m pretty well set in those areas and I already have professionals helping me. Instead, I wanted an advisor who would create a plan for meeting my financial goals and help me manage my investments. Here are some things that were important to me when looking for a financial advisor:
After one advisor failed to turn up for our appointment, I realized how important it was to have someone who was dependable and trustworthy.
I wanted someone with reputable credentials, such as the Chartered Financial Analyst or Certified Financial Planner designation. In addition, the advisor couldn���t work on commission because that creates an incentive to push high-cost financial products.
I wanted my own dedicated financial advisor, with the ability to schedule an appointment when needed. I wasn���t willing to leave my investment portfolio in the hands of a robo-advisor, with no human interaction.
I wanted a portfolio designed specifically for my circumstances, needs and goals.
I wanted my portfolio built primarily with low-cost, broad-based index funds.
I wanted transparency, with the ability to go online and see up-to-date information on the total management fees incurred, my portfolio���s performance and the likelihood of meeting my financial goals.
I wanted excellent customer support not just from my financial advisor, but from the whole organization.
I didn���t want to pay for the initial investment plan. If I didn���t like the plan, I wanted to be able to walk away without incurring a fee.
Finally, I wasn���t willing to pay someone 1% of assets per year to manage my investments. It would have to be considerably less.
I decided to go with Vanguard Personal Advisor Services. I���ve been a Vanguard Group client for more than 35 years and felt comfortable with the people there managing my money. Since I already had most of my money with the firm, it was easy to swap over to the advisory service.
After three years, I���m happy with my portfolio���s performance and with the customer service. But in the back of my mind, I keep wondering whether I���d be better off in a Vanguard Target Retirement Fund that meets my desired asset allocation.
These funds offer a diversified, professionally managed portfolio���and the cost is just 0.12% to 0.15% a year. That���s less than half the cost of the advisory service, which is typically 0.3% a year plus the expenses of the underlying funds. Each target fund is made up of low-cost, broad-based index funds, similar to what my advisor-managed portfolio owns. It���s a type of fund you can literally forget about because it makes all the investment decisions. You don���t even have to keep tabs on your asset allocation because it rebalances for you.
How important is access to a financial advisor and having a personalized financial plan? Is it worth the added expense? So far, the answer is, ���yes.��� But those target retirement funds sure look tempting.
Dennis Friedman retired from Boeing Satellite Systems after a 30-year career in manufacturing. Born in Ohio, Dennis is a California transplant with a bachelor's degree in history and an MBA. A self-described "humble investor," he likes reading historical novels and about personal finance. Check out his earlier��articles��and follow him on Twitter @DMFrie.The post Calling for Backup appeared first on HumbleDollar.
June 28, 2021
Magic Number
MY MOM AND DAD split up when I was seven years old. Money was an issue for the rest of my childhood. Mom was rarely able to work fulltime and, according to her, child support and alimony were never enough.
When I started working a newspaper stand at age 12, I was expected to give 25% of my daily take for rent. Mom also demanded that I save at least 10%. Depending on the headlines, I would make between $1.50 and $3 each day. Each night, I would drop a few coins in my savings cup. I never had an allowance, but I was a high-roller when it came to hanging out with my middle-school friends over cokes and candy bars (which might mean I wasn���t too good at saving).
To my mom���s chagrin, I didn���t share her passion for saving money as I grew into young adulthood. Between a growing gambling addiction and a penchant for using credit cards to finance everyday life, my financial life was in ruins by my early 20s. Thankfully, I got help for the gambling addiction and fell in love with a woman who took financial management and budgeting seriously.
On our second date, I went to her apartment to pick up her and her three-year-old son to see the latest Disney movie. She invited me into the kitchen for a drink of water. On the refrigerator was her biweekly budget for all the world, and maybe especially me, to see. It wasn���t a rounded-up budget, either. It was a ���$78 for food, $11 for telephone, $35 for gas and $43 for savings��� type of budget. It scared me so much I almost didn���t ask her out again.
I have now been married to her for more than 35 years. While we eventually overcame our money differences, the early years were sometimes challenging. I could, and probably will, one day write about how a budgeter and a non-budgeter came together. But I want to focus on something different: the magic numbers of financial management. Or what I sometimes have preached and taught: how to enjoy both financial peace and prosperity.
I don���t remember many financial instructions from my first 25 years of life���except to save 10% of anything I made. My wife and I were raised by parents who survived the Great Depression. They demanded, cajoled and begged us to save at least 10% and promised that, if we did, our financial future would be secure. My wife heeded their advice. Me not so much.
As I got older and started caring about financial matters, I learned there were a lot of mathematicians involved in giving financial advice. Every year, the perfect percentage of stocks and bonds in your asset allocation, as well as the right sum to take out of your paycheck to put in a 401(k) and to put toward an emergency fund and to cover living expenses, seemed to change. If you only save 10% today, you might be in big trouble in 20 to 30 years, or so some said. Recently, I read an article that said the magic numbers now are 50-30-20. Meaning what? Spend 50% on needs, 30% on wants and 20% on your financial goals.
I didn���t grow up near any religion. When my wife and I began attending a ���trans-denominational��� church in the mid-1980s, the message was a little Western, a little Eastern and a little new age. The community was what we enjoyed most. Every Sunday, a lay person or couple shared something about giving and generosity. One couple, who was our age, talked about tithing���giving away 10% of their income���and how it changed their lives. My wife and I were intrigued. Who doesn���t like giving money away? I started researching and my wife started budgeting. I was convinced there was something ���magical��� in the 10% number, plus it was easy to figure out.
We decided to start giving away 10% of our income to God and the good. We looked at our budget and added 10% to give away���after we paid taxes, the mortgage, food and childcare. It was a small number, but it was 10% of something. Each year, we gained the courage to bump up the number. Finally, one year, I suggested to my wife or she suggested to me���we don���t agree on this one���that we go for it and give away 10% of our income before deducting taxes and everything else. We built our budget to include 10% tithing, 80% living expenses and 10% savings. It became easier and easier to do.
But when I left the corporate world to attend seminary, we had a decision to make. We couldn���t do 10-80-10 (tithe, spend, save) on our limited income. My wife and I looked at our budget and decided 10% tithing was more important than 10% saving. For four years, we saved nothing but continued to tithe. We survived financially and we became convinced the right formula for us was to give away 10% first and figure out the savings later. We never told our parents, but it worked out and continues to do so.
We have now tithed for more than 30 years. I tell people it���s the greatest spiritual practice and leap of faith I���ve ever taken. Giving away 10% of anything we earn to people and organizations that may need it more than we do, and are doing something good for the world, is a constant reminder that we have enough���even when we���re afraid that we don���t. I would never have quit my job or gone to seminary if we hadn���t started doing this. It���s hard to explain the sense of joy, peace and faith I've experienced from trusting there���s enough to share with others.
Giving away 10% of one���s earnings seems impossible to some. It sure did to us. But in working with individuals and organizations over the years, I���ve seen the power and delight that comes when people learn how to do it. I have never met an ex-tither. I only meet people who want to learn how to be able to take care of all their wants and needs, and to give to others as well. Although I joke that I probably lost credibility in recommending tithing as a core financial practice when I became a minister, the truth is I was a tithing sales manager, tithing training manager and tithing unemployed seminarian long before I was a minister.
Financial peace of mind without financial security is difficult and perhaps dangerous. Financial security without peace of mind is a recipe for greed and lusting for more. The 10-80-10 guideline has provided us both financial peace of mind and relative prosperity. From my experience, it���s the closest you can get to a 100% financial guarantee���if your goal is both peace and prosperity.
Don Southworth is a semi-retired minister, consultant and tax preparer living in Chapel Hill, North Carolina. He recently completed his Certified Financial Planner education.��
Don is passionate about the intersection between spirituality and money, and he encourages people to follow their callings wherever they lead.��
Don's previous articles were Answering the Call and��Twin Certainties. Follow him on Twitter @Calltrepreneur.
The post Magic Number appeared first on HumbleDollar.
June 27, 2021
Their Loss, Your Gain
LONG-TERM-CARE insurance policies are, in my opinion, both a blessing and a curse. They're a blessing because they can help cover critical and costly care when a family might have no other financial options.
But they can also feel like a curse. That's because of what many owners of traditional long-term-care (LTC) insurance refer to as ���the letter.��� This is the renewal letter that policyholders receive each year. These letters provide a menu of renewal options, each of which offers some combination of premium increases and benefit cuts. But unlike most insurance policies, which might impose a modest or at least manageable increase each year, it isn���t uncommon to see LTC premiums jump by 10%, 20% or more���sometimes much more.
As a result, the options in these letters generally range from unpalatable to unaffordable to downright depressing, plus the decision is often complicated. These letters frequently present a matrix of choices, with options along multiple dimensions, including:
Cost
Maximum daily benefit
Inflation benefit
Elimination period
Benefit period
Total lifetime benefit
Cash payment to policyholder
Because there are so many variables, the renewal decision defies straightforward cost-benefit analysis, making it an agonizing annual dilemma for policyholders.
If you or a family member has one of these policies, how should you approach the decision? Before getting into the details, it���s important first to understand some background���in other words, why these letters are even necessary.
The fundamental problem in the LTC market isn't difficult to grasp: When insurers created these products, they miscalculated and priced them far too low. There were three reasons for this:
Health care costs have increased much faster than expected.��Over the past 20 years, health care inflation has��outpaced��the overall inflation rate by almost 1�� percentage points a year. Compounded over time, the result has been a steep increase in the size of claims.
Policyholders held on to policies much longer than expected.��With a product like long-term-care insurance, the most profitable customer is the one who pays premiums for a period of years but then cancels before ever making a claim. LTC customers, however, didn���t cancel at nearly the expected rate. Genworth, the largest player in LTC coverage,��expected a lapse rate around 5%. But the actual rate has been an order of magnitude lower���just 0.7%.
Interest rates have been much lower than expected.��Since insurance companies invest a large part of the premiums they receive in bonds, this has been an increasing problem. In fact, the timing couldn���t have been worse. Interest rates have been falling since the early 1980s, which is precisely when LTC policies started to become popular. More than any other kind of coverage, this has been a problem for LTC insurers because these policies are intended to be lifetime commitments, and yet the longest-term bond is just 30 years. Insurers weren���t able to fully protect themselves by��matching��assets and liabilities, as they normally do. This has spurred some insurers to offer a different type of LTC insurance���known as hybrid policies���which haven���t had these pricing problems.
Indeed, traditional LTC insurance has been a disaster for insurers. Genworth alone has incurred billions in losses on its LTC business. Losses there have��averaged��$425 million per year in recent years. To stop the bleeding, insurers are doing everything they can to fix the pricing on these policies. That explains the frequently brutal renewal terms.
As a consumer, if you���re on the receiving end of a renewal letter, how should you approach the decision? Here are three recommendations:
Hold the line on benefits.��All things being equal, a cut to benefits is more profitable to an insurer than an increase in premiums. That���s because claims can come in at any time, while premium increases are received only incrementally over time. Result: An insurer would much rather you accepted a reduction in benefits. As a consumer, then, this should be the last thing you do. If you can afford it, pay to retain your policy���s current maximum daily benefit.
Take it one year at a time.��Many renewal letters will include language along the lines of: ���Please be aware that over the next X years, we intend to seek additional rate increases...��� and they���ll often include a staggeringly high number. The operative words here are ���intend to seek.��� The reality is that rate increases must be approved by each state���s commissioner of insurance���and they don���t approve every increase that���s requested. The job of insurance regulators is to achieve a delicate balance: They want to protect consumers from rising rates. But if they squeeze insurers too much, they'll become insolvent. The rate increases that your insurer��seeks may not fully materialize, so don���t let the prospect of future increases scare you into dropping your policy. Instead, take it year by year.
Read between the lines.��Some letters will offer buyouts���literally paying a policyholder to cancel coverage or reduce benefits to a level that���s akin to canceling. I once saw a renewal letter that proposed cutting the��total lifetime��benefit of a policy to less than $5,000 in exchange for an upfront payment to the policyholder. It was an absurd option, but it was also very telling. If your insurance company���s actuaries are so eager to have you cancel, that likely means you���re getting the better end of the deal. The logical conclusion: In cases like this, you're better off not accepting a buyout. If you can afford to keep up with the premiums, stick with it.
The key thing to understand here is that insurance companies have, in effect, been providing subsidies for years to LTC policyholders. And the fact that insurers are still taking losses on these policies tells you that these subsidies haven���t fully gone away. That���s thanks to regulators, who have been keeping a lid on price increases. If you���re a policyholder on the receiving end of a renewal letter, the increases probably seem jarring���and they are. But as aggravating as these increases are, the fact that insurers are still taking losses tells you that, as a policyholder, you���re still getting the better end of the bargain.
Adam M. Grossman��is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on Twitter @AdamMGrossman��and check out his earlier articles.
But they can also feel like a curse. That's because of what many owners of traditional long-term-care (LTC) insurance refer to as ���the letter.��� This is the renewal letter that policyholders receive each year. These letters provide a menu of renewal options, each of which offers some combination of premium increases and benefit cuts. But unlike most insurance policies, which might impose a modest or at least manageable increase each year, it isn���t uncommon to see LTC premiums jump by 10%, 20% or more���sometimes much more.
As a result, the options in these letters generally range from unpalatable to unaffordable to downright depressing, plus the decision is often complicated. These letters frequently present a matrix of choices, with options along multiple dimensions, including:
Cost
Maximum daily benefit
Inflation benefit
Elimination period
Benefit period
Total lifetime benefit
Cash payment to policyholder
Because there are so many variables, the renewal decision defies straightforward cost-benefit analysis, making it an agonizing annual dilemma for policyholders.
If you or a family member has one of these policies, how should you approach the decision? Before getting into the details, it���s important first to understand some background���in other words, why these letters are even necessary.
The fundamental problem in the LTC market isn't difficult to grasp: When insurers created these products, they miscalculated and priced them far too low. There were three reasons for this:
Health care costs have increased much faster than expected.��Over the past 20 years, health care inflation has��outpaced��the overall inflation rate by almost 1�� percentage points a year. Compounded over time, the result has been a steep increase in the size of claims.
Policyholders held on to policies much longer than expected.��With a product like long-term-care insurance, the most profitable customer is the one who pays premiums for a period of years but then cancels before ever making a claim. LTC customers, however, didn���t cancel at nearly the expected rate. Genworth, the largest player in LTC coverage,��expected a lapse rate around 5%. But the actual rate has been an order of magnitude lower���just 0.7%.
Interest rates have been much lower than expected.��Since insurance companies invest a large part of the premiums they receive in bonds, this has been an increasing problem. In fact, the timing couldn���t have been worse. Interest rates have been falling since the early 1980s, which is precisely when LTC policies started to become popular. More than any other kind of coverage, this has been a problem for LTC insurers because these policies are intended to be lifetime commitments, and yet the longest-term bond is just 30 years. Insurers weren���t able to fully protect themselves by��matching��assets and liabilities, as they normally do. This has spurred some insurers to offer a different type of LTC insurance���known as hybrid policies���which haven���t had these pricing problems.
Indeed, traditional LTC insurance has been a disaster for insurers. Genworth alone has incurred billions in losses on its LTC business. Losses there have��averaged��$425 million per year in recent years. To stop the bleeding, insurers are doing everything they can to fix the pricing on these policies. That explains the frequently brutal renewal terms.
As a consumer, if you���re on the receiving end of a renewal letter, how should you approach the decision? Here are three recommendations:
Hold the line on benefits.��All things being equal, a cut to benefits is more profitable to an insurer than an increase in premiums. That���s because claims can come in at any time, while premium increases are received only incrementally over time. Result: An insurer would much rather you accepted a reduction in benefits. As a consumer, then, this should be the last thing you do. If you can afford it, pay to retain your policy���s current maximum daily benefit.
Take it one year at a time.��Many renewal letters will include language along the lines of: ���Please be aware that over the next X years, we intend to seek additional rate increases...��� and they���ll often include a staggeringly high number. The operative words here are ���intend to seek.��� The reality is that rate increases must be approved by each state���s commissioner of insurance���and they don���t approve every increase that���s requested. The job of insurance regulators is to achieve a delicate balance: They want to protect consumers from rising rates. But if they squeeze insurers too much, they'll become insolvent. The rate increases that your insurer��seeks may not fully materialize, so don���t let the prospect of future increases scare you into dropping your policy. Instead, take it year by year.
Read between the lines.��Some letters will offer buyouts���literally paying a policyholder to cancel coverage or reduce benefits to a level that���s akin to canceling. I once saw a renewal letter that proposed cutting the��total lifetime��benefit of a policy to less than $5,000 in exchange for an upfront payment to the policyholder. It was an absurd option, but it was also very telling. If your insurance company���s actuaries are so eager to have you cancel, that likely means you���re getting the better end of the deal. The logical conclusion: In cases like this, you're better off not accepting a buyout. If you can afford to keep up with the premiums, stick with it.
The key thing to understand here is that insurance companies have, in effect, been providing subsidies for years to LTC policyholders. And the fact that insurers are still taking losses on these policies tells you that these subsidies haven���t fully gone away. That���s thanks to regulators, who have been keeping a lid on price increases. If you���re a policyholder on the receiving end of a renewal letter, the increases probably seem jarring���and they are. But as aggravating as these increases are, the fact that insurers are still taking losses tells you that, as a policyholder, you���re still getting the better end of the bargain.
Adam M. Grossman��is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on Twitter @AdamMGrossman��and check out his earlier articles.The post Their Loss, Your Gain appeared first on HumbleDollar.
June 26, 2021
Skimping on Cash
EMERGENCY MONEY is dead money—and it’s rarely looked more dead.
Just as we shouldn’t carry more insurance coverage than we really need, we shouldn’t hold more emergency cash than necessary. Why not? Excessive money spent on insurance and kept in our emergency reserve will likely come with a hefty opportunity cost. Indeed, thanks to the double whammy of inflation and taxes, our cash reserve will slowly depreciate, and that’s especially true given today’s rock-bottom interest rates.
What to do? Conventional wisdom says you should have a cash reserve equal to three to six months of living expenses. My advice: Figure out if you can hold far less—by pondering both your living costs and alternative sources of cash. To that end, consider these eight steps:
1. Calculate your fixed costs. You might have to cut spending temporarily if, say, you need all available cash to pay for a new furnace, roof or car. More worrisome, you might find yourself without a paycheck because you get laid off or ill-health prevents you from working.
In these scenarios, you’ll likely want to cut out much or all discretionary spending, so your only expenses are your fixed living costs—things like mortgage or rent, car payments, utilities, groceries and insurance premiums. How much do these run each month and, in a financial pinch, are there any items you can eliminate? Figuring this out is a crucial first step in developing your emergency plan.
2. Recast your mortgage. For most folks, their biggest fixed living cost is housing. Is there any way to reduce this expense? I’m a fan of paying down mortgage debt as an alternative to buying bonds. Planning to make a large onetime extra-principal payment of perhaps $5,000 or $10,000 on a fixed-rate loan? Consider coupling it with a mortgage recasting.
Not all mortgages can be recast. But if your lender allows it, you’ll need to cough up not just a large extra-principal payment, but also a fee of up to $500. In return, the mortgage company will reduce your monthly payment to reflect your new lower principal balance, while keeping the loan’s term and interest rate the same. Result: Going forward, you’ll have lower fixed living costs—and more financial breathing room if you get hit with a financial emergency.
I wish I’d been aware of this option when I had a mortgage. I made regular extra-principal payments for many years. A recasting would have sharply reduced my required monthly mortgage payments, leaving me in much better financial shape if I’d lost my job.
3. Tap home equity. Some folks argue against making extra-principal payments on a mortgage, noting that—in a financial emergency—you’d be better off having the cash sitting in a savings account. It’s a reasonable argument. But you can sidestep the problem by setting up a home-equity line of credit, or HELOC, which would allow you to tap into your home’s value. Just be sure to set up the credit line while you’re still employed and hence still look attractive to lenders.
What if you’re already retired? Instead of a HELOC, you could arrange a standby reverse mortgage. The idea is to establish a credit line that grows over time, which you might then use later in retirement if you start to deplete your nest egg. You could also use the credit line to cover financial emergencies, especially if it seems like a bad time to cash in stocks and bonds. The strategy has been endorsed by experts, though—I must confess—I’m leery of the steep fees involved.
4. Stash money in a Roth IRA. If you want your dollars to do double duty, consider making regular annual contributions to a Roth IRA. Suppose you put $6,000 a year in a Roth for the next four years. Ideally, you’d leave the $24,000 to continue growing tax-free. But if calamity strikes, your retirement fund could become your emergency fund—and you could withdraw that $24,000. Provided you don’t touch your Roth IRA’s investment earnings, there’d be no taxes or penalties owed.
5. Fund a health savings account. Like a Roth IRA, a health savings account (HSA) can do double duty. The strategy: Buy a qualifying high-deductible health insurance policy and fund a companion HSA. Thereafter, when you incur medical expenses, pay the costs out of pocket but hang on to the receipts. If you’re hit with a financial emergency, you can use those old receipts to make tax-free withdrawals from your HSA. What if there’s no need to draw on the account? You might leave your HSA to grow tax-free and then use it to pay medical expenses in retirement.
6. Tap your 401(k). If you lose your job, a 401(k) loan wouldn’t be an option. In fact, if you leave your employer, these loans must typically be repaid right away, or you’ll face income taxes and penalties. Still, a 401(k) loan could be useful in other financial emergencies. Keep in mind that these loans aren’t really loans. Instead, the money you receive reduces your 401(k) account balance—and the true cost is the investment gains that the money no longer earns.
7. Borrow on margin. I’m not a fan of margin loans, which involve borrowing against the value of a taxable brokerage account. But if you restrict the loan to, say, 20% of your account’s balance, the risk involved is modest. Yes, if you take out a margin loan, you’ll have to pay interest. But that occasional cost could be a small price to pay if it allows you to sit on less cash.
8. Take out a life insurance loan. As with margin loans, I’m no fan of cash-value life insurance. But all too many folks end up with these policies when they’d be far better off with low-cost term insurance. In fact, cash-value life insurance accounted for 59% of the life insurance policies sold to individuals in 2019—a statistic I find shocking.
Got one of these turkeys? If you find yourself in a financial pinch, you might put it to good use by taking out a life insurance loan. But—as with 401(k) and margin loans—be sure to pay off any life insurance loans as quickly as possible.
Latest Articles
HERE ARE THE SIX other articles published by HumbleDollar this week:
Even the Federal Reserve struggles to figure out what will happen next in the economy. What to do about all the uncertainty? Adam Grossman suggests six precautions.
Whether you're renovating your home or managing your finances, Mike Flack has some advice: Do a little of the work yourself—and you'll get a lot more out of the experts you hire.
"I’m not suggesting everyone quit funding 529 plans," says Joe Kesler. "Still, the world of education is changing fast—and perhaps a well-funded college account isn’t the key to getting ahead."
What are the best purchases you’ve ever made? Sanjib Saha lists his top six—and those don't include the fanny pack.
Back in 2018, Kyle McIntosh bought shares of a special purpose acquisition company. Today, he’s a shareholder in a payment processing firm. Interested in SPACs? Check out Kyle's story.
"When you buy a total U.S. market fund, you’re essentially buying big companies," notes Mike Zaccardi. "I’d argue that spicing it up with some extra mid-cap exposure can make sense."
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier articles.
Just as we shouldn’t carry more insurance coverage than we really need, we shouldn’t hold more emergency cash than necessary. Why not? Excessive money spent on insurance and kept in our emergency reserve will likely come with a hefty opportunity cost. Indeed, thanks to the double whammy of inflation and taxes, our cash reserve will slowly depreciate, and that’s especially true given today’s rock-bottom interest rates.
What to do? Conventional wisdom says you should have a cash reserve equal to three to six months of living expenses. My advice: Figure out if you can hold far less—by pondering both your living costs and alternative sources of cash. To that end, consider these eight steps:
1. Calculate your fixed costs. You might have to cut spending temporarily if, say, you need all available cash to pay for a new furnace, roof or car. More worrisome, you might find yourself without a paycheck because you get laid off or ill-health prevents you from working.
In these scenarios, you’ll likely want to cut out much or all discretionary spending, so your only expenses are your fixed living costs—things like mortgage or rent, car payments, utilities, groceries and insurance premiums. How much do these run each month and, in a financial pinch, are there any items you can eliminate? Figuring this out is a crucial first step in developing your emergency plan.
2. Recast your mortgage. For most folks, their biggest fixed living cost is housing. Is there any way to reduce this expense? I’m a fan of paying down mortgage debt as an alternative to buying bonds. Planning to make a large onetime extra-principal payment of perhaps $5,000 or $10,000 on a fixed-rate loan? Consider coupling it with a mortgage recasting.
Not all mortgages can be recast. But if your lender allows it, you’ll need to cough up not just a large extra-principal payment, but also a fee of up to $500. In return, the mortgage company will reduce your monthly payment to reflect your new lower principal balance, while keeping the loan’s term and interest rate the same. Result: Going forward, you’ll have lower fixed living costs—and more financial breathing room if you get hit with a financial emergency.
I wish I’d been aware of this option when I had a mortgage. I made regular extra-principal payments for many years. A recasting would have sharply reduced my required monthly mortgage payments, leaving me in much better financial shape if I’d lost my job.
3. Tap home equity. Some folks argue against making extra-principal payments on a mortgage, noting that—in a financial emergency—you’d be better off having the cash sitting in a savings account. It’s a reasonable argument. But you can sidestep the problem by setting up a home-equity line of credit, or HELOC, which would allow you to tap into your home’s value. Just be sure to set up the credit line while you’re still employed and hence still look attractive to lenders.
What if you’re already retired? Instead of a HELOC, you could arrange a standby reverse mortgage. The idea is to establish a credit line that grows over time, which you might then use later in retirement if you start to deplete your nest egg. You could also use the credit line to cover financial emergencies, especially if it seems like a bad time to cash in stocks and bonds. The strategy has been endorsed by experts, though—I must confess—I’m leery of the steep fees involved.
4. Stash money in a Roth IRA. If you want your dollars to do double duty, consider making regular annual contributions to a Roth IRA. Suppose you put $6,000 a year in a Roth for the next four years. Ideally, you’d leave the $24,000 to continue growing tax-free. But if calamity strikes, your retirement fund could become your emergency fund—and you could withdraw that $24,000. Provided you don’t touch your Roth IRA’s investment earnings, there’d be no taxes or penalties owed.
5. Fund a health savings account. Like a Roth IRA, a health savings account (HSA) can do double duty. The strategy: Buy a qualifying high-deductible health insurance policy and fund a companion HSA. Thereafter, when you incur medical expenses, pay the costs out of pocket but hang on to the receipts. If you’re hit with a financial emergency, you can use those old receipts to make tax-free withdrawals from your HSA. What if there’s no need to draw on the account? You might leave your HSA to grow tax-free and then use it to pay medical expenses in retirement.
6. Tap your 401(k). If you lose your job, a 401(k) loan wouldn’t be an option. In fact, if you leave your employer, these loans must typically be repaid right away, or you’ll face income taxes and penalties. Still, a 401(k) loan could be useful in other financial emergencies. Keep in mind that these loans aren’t really loans. Instead, the money you receive reduces your 401(k) account balance—and the true cost is the investment gains that the money no longer earns.
7. Borrow on margin. I’m not a fan of margin loans, which involve borrowing against the value of a taxable brokerage account. But if you restrict the loan to, say, 20% of your account’s balance, the risk involved is modest. Yes, if you take out a margin loan, you’ll have to pay interest. But that occasional cost could be a small price to pay if it allows you to sit on less cash.
8. Take out a life insurance loan. As with margin loans, I’m no fan of cash-value life insurance. But all too many folks end up with these policies when they’d be far better off with low-cost term insurance. In fact, cash-value life insurance accounted for 59% of the life insurance policies sold to individuals in 2019—a statistic I find shocking.
Got one of these turkeys? If you find yourself in a financial pinch, you might put it to good use by taking out a life insurance loan. But—as with 401(k) and margin loans—be sure to pay off any life insurance loans as quickly as possible.
Latest Articles
HERE ARE THE SIX other articles published by HumbleDollar this week:
Even the Federal Reserve struggles to figure out what will happen next in the economy. What to do about all the uncertainty? Adam Grossman suggests six precautions.
Whether you're renovating your home or managing your finances, Mike Flack has some advice: Do a little of the work yourself—and you'll get a lot more out of the experts you hire.
"I’m not suggesting everyone quit funding 529 plans," says Joe Kesler. "Still, the world of education is changing fast—and perhaps a well-funded college account isn’t the key to getting ahead."
What are the best purchases you’ve ever made? Sanjib Saha lists his top six—and those don't include the fanny pack.
Back in 2018, Kyle McIntosh bought shares of a special purpose acquisition company. Today, he’s a shareholder in a payment processing firm. Interested in SPACs? Check out Kyle's story.
"When you buy a total U.S. market fund, you’re essentially buying big companies," notes Mike Zaccardi. "I’d argue that spicing it up with some extra mid-cap exposure can make sense."
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier articles.The post Skimping on Cash appeared first on HumbleDollar.
June 25, 2021
Far From Middling
YOU MIGHT RECALL Malcolm in the Middle, a turn-of-the-century TV sitcom in which the middle child often feels ignored. That���s kind of what goes on with midsized stocks.
Large-capitalization growth shares and small-cap value stocks seem to get all the attention these days. The former feature the FAAMG companies (Facebook, Apple, Amazon, Microsoft and Google) and other 2020 winners, while the latter are the darling of investors who embrace academic research showing strong long-term outperformance by small-cap value shares.
But how about some kudos for midsized stocks? Bank of America recently compared U.S. large, mid-cap and small-cap total returns since 1978. A $1 initial investment would have grown to $139 in large-cap stocks, $181 in small-cap shares and $199 in the mid-cap index. That���s a 13.1% annual return for mid-caps.
Why have mid-cap stocks performed so well? One possibility: The category includes smaller companies that are reasonably valued but growing fast���and the best performers among them get handed off to the large-cap index when they get big and are likely to turn sluggish.
Knowing a portfolio���s sector composition is important. Mid-caps are more tilted to the industrials, real estate, financials and materials sectors than the large-cap index, but less exposed to communication services and information technology. Result: Mid-cap stocks are more value-oriented than large-caps.
This also seems to be a part of the market that���s overlooked. Bank of America says that, since 2003, mid-cap funds received just 4.6% of all exchange-traded stock fund flows, versus 7.9% for small-caps and 87.5% for large-caps. Perhaps mid-caps deserve more attention. Earnings growth for mid-caps has averaged 9.2% a year since 1995, versus just 6.4% for large-cap companies.
Some investors claim they get mid-cap exposure through total market index funds like Vanguard Total Stock Market ETF (symbol: VTI). But the data show that the Vanguard fund has just an 18% weight in mid-caps, according to the Morningstar style box. Instead, more than 70% of the fund is in large-cap shares. When you buy a total U.S. market fund, you���re essentially buying big companies. I���d argue that spicing it up with some extra mid-cap exposure, and maybe also some small-cap value, can make sense.
You could get your fix of mid-cap stocks with a fund like Vanguard Mid-Cap ETF (VO). Its biggest holdings include companies like Amphenol Corp., Digital Realty Trust, IDEXX Laboratories and Microchip Technology. Are you familiar with all of these? Neither am I.
But there���s no need to fret over the largest holdings in a mid-cap index fund. If a stock grows really big, it���ll get called up to the large-cap index. As a result, mid-cap index funds tend to spread their assets more evenly than the top-heavy large-cap index funds. For instance, the top 10 holdings in Vanguard Mid-Cap ETF represent 6% of total assets, versus 26% for Vanguard Large-Cap ETF (VV).
There are other solid mid-cap fund options, including iShares Core S&P Mid-Cap ETF (IJH), iShares Russell Mid-Cap ETF (IWR), Schwab U.S. Mid-Cap ETF (SCHM) and SPDR S&P MidCap 400 ETF (MDY).
Another route is to own the ���extended market��� through a fund like Vanguard Extended Market ETF (VXF), which owns everything outside the S&P 500. Interestingly, Vanguard Extended Market owned Tesla last year, whereas some mid-cap index funds did not���resulting in higher 2020 returns for Vanguard and other extended market funds.
Mike Zaccardi is an adjunct finance instructor at the University of North Florida, as well as an investment writer for financial advisors and investment firms. He's a CFA�� charterholder and Chartered Market Technician��, and has passed the coursework for the Certified Financial Planner program. Follow Mike on Twitter @MikeZaccardi, connect with him via LinkedIn, email him at MikeCZaccardi@gmail.com��and check out his earlier articles.
Large-capitalization growth shares and small-cap value stocks seem to get all the attention these days. The former feature the FAAMG companies (Facebook, Apple, Amazon, Microsoft and Google) and other 2020 winners, while the latter are the darling of investors who embrace academic research showing strong long-term outperformance by small-cap value shares.
But how about some kudos for midsized stocks? Bank of America recently compared U.S. large, mid-cap and small-cap total returns since 1978. A $1 initial investment would have grown to $139 in large-cap stocks, $181 in small-cap shares and $199 in the mid-cap index. That���s a 13.1% annual return for mid-caps.
Why have mid-cap stocks performed so well? One possibility: The category includes smaller companies that are reasonably valued but growing fast���and the best performers among them get handed off to the large-cap index when they get big and are likely to turn sluggish.
Knowing a portfolio���s sector composition is important. Mid-caps are more tilted to the industrials, real estate, financials and materials sectors than the large-cap index, but less exposed to communication services and information technology. Result: Mid-cap stocks are more value-oriented than large-caps.
This also seems to be a part of the market that���s overlooked. Bank of America says that, since 2003, mid-cap funds received just 4.6% of all exchange-traded stock fund flows, versus 7.9% for small-caps and 87.5% for large-caps. Perhaps mid-caps deserve more attention. Earnings growth for mid-caps has averaged 9.2% a year since 1995, versus just 6.4% for large-cap companies.
Some investors claim they get mid-cap exposure through total market index funds like Vanguard Total Stock Market ETF (symbol: VTI). But the data show that the Vanguard fund has just an 18% weight in mid-caps, according to the Morningstar style box. Instead, more than 70% of the fund is in large-cap shares. When you buy a total U.S. market fund, you���re essentially buying big companies. I���d argue that spicing it up with some extra mid-cap exposure, and maybe also some small-cap value, can make sense.
You could get your fix of mid-cap stocks with a fund like Vanguard Mid-Cap ETF (VO). Its biggest holdings include companies like Amphenol Corp., Digital Realty Trust, IDEXX Laboratories and Microchip Technology. Are you familiar with all of these? Neither am I.
But there���s no need to fret over the largest holdings in a mid-cap index fund. If a stock grows really big, it���ll get called up to the large-cap index. As a result, mid-cap index funds tend to spread their assets more evenly than the top-heavy large-cap index funds. For instance, the top 10 holdings in Vanguard Mid-Cap ETF represent 6% of total assets, versus 26% for Vanguard Large-Cap ETF (VV).
There are other solid mid-cap fund options, including iShares Core S&P Mid-Cap ETF (IJH), iShares Russell Mid-Cap ETF (IWR), Schwab U.S. Mid-Cap ETF (SCHM) and SPDR S&P MidCap 400 ETF (MDY).
Another route is to own the ���extended market��� through a fund like Vanguard Extended Market ETF (VXF), which owns everything outside the S&P 500. Interestingly, Vanguard Extended Market owned Tesla last year, whereas some mid-cap index funds did not���resulting in higher 2020 returns for Vanguard and other extended market funds.
Mike Zaccardi is an adjunct finance instructor at the University of North Florida, as well as an investment writer for financial advisors and investment firms. He's a CFA�� charterholder and Chartered Market Technician��, and has passed the coursework for the Certified Financial Planner program. Follow Mike on Twitter @MikeZaccardi, connect with him via LinkedIn, email him at MikeCZaccardi@gmail.com��and check out his earlier articles.
The post Far From Middling appeared first on HumbleDollar.
June 24, 2021
Hammered Home
ALMOST 20 YEARS AGO, we renovated our entire Washington, DC, home. The memory is still quite fresh. If you���ve ever renovated a house, you���ll understand.
A home renovation has similarities to personal finance: You can do it yourself (DIY), you can pay someone to do it for you, or you can do something in between. This last approach has worked well for me���both with renovations and financial matters.
Our home consisted of a three-level townhouse. I decided to renovate it in detail, top to bottom, one floor at a time. I told myself���and my wife���that we were doing it this way to reduce the fiscal pain. But in the end, I just wound up increasing the mental pain. Here���s what I learned from the experience:
1. It���s difficult to find a good contractor. You can ask friends for recommendations, search the internet, check references and interview multiple contractors. But in the end, it���s a crapshoot.
By the end of the third-floor renovation, I had become fed up with the contractor I���d hired. Ditto for the second-floor contractor. Checking references and interviewing can only do so much. In both cases, the guy I interviewed didn���t manage the actual work. Instead, one of his underlings did. Our third contractor���who worked on the first floor���was excellent. But when I subsequently tried to contact him to do further work for us,I found he���d disappeared.
It���s the same with financial advisors. Over the years, I���ve twice hired accountants to prepare our taxes. But after working with them, I noticed they never asked any questions or provided any guidance. I later realized they may not have done the actual work, which was confirmed by a friend who���s a partner at a New York City accounting firm. He informed me that, while he signs the 1040s as ���paid preparer,��� he has his staff actually complete the returns. Another time, I must have spent 10 hours with a Capital One financial advisor preparing a financial plan, only for him to get promoted and never call me back.
2. If you want to get more out of your contractor, try a little DIY. As the renovations continued, I started doing more of the work myself. While I did it mainly to save money, I found that some of it was enjoyable. Watching a light come on after you wired a switch is more satisfying than a hundred spreadsheets.
Each small job made me feel more confident and better able to perform the next, larger job. If I never installed the light switch, there was no way I could have installed the 240-volt service to the dryer. Each job also made me a little more knowledgeable, so that���when I managed my next contractor���I understood a little more of what he was saying and whether it was the best advice for our house.
You may think that you have no skills and therefore DIY is not an option. I felt the same way at one point, but I was determined to try, so I did the demolition on our second bathroom. I���m as good at breaking stuff as the next guy. The demolition led to some rough plumbing, which led to the aforementioned electrical work.
This DIY technique can also help when managing financial advisors. The first year I had to submit a tax return, my preparer made a mistake that I was lucky to catch, so I handled the return myself the next year. That was quite satisfying, enabling me to learn about the tax code, better understand my finances and gain confidence.
This then allowed me to tackle future tax returns, which gradually became more complicated. A few times, I had to hire an accountant, but each time I felt I learned a little more. If I didn���t have this basic understanding of my taxes and therefore my finances, I would have been at a severe disadvantage when hiring each advisor. Also, I���m not sure I could have determined if what they were saying was the correct advice for me.
3. You need some basic understanding of home renovation. After all, how else could you adequately supervise a contractor? And trust me, they all need supervising. One contractor notched out support beams to install some of the plumbing. If I didn���t realize this was an issue, he would have compromised the integrity of the house.
Similarly, my Capital One advisor recommended I sell many of my long-held stocks to conform to the financial plan he created. If I just went along, I would have been hit hard with capital gains taxes.
Now that I���m retired, my tax situation has become simpler���fewer forms, no state income tax, no deductions���which makes me more confident about using the DIY option both for preparing our taxes and managing our finances. Don���t get me wrong: If I need to avail myself of a professional���s services, I will. But as I see it, if you���re making no effort to DIY, you���re wasting an opportunity not just to save money, but to become far smarter about your finances.
Michael Flack blogs at��AfterActionReport.info. He���s a former naval officer and 20-year veteran of the oil and gas industry. Now retired, Mike enjoys traveling, blogging and spreadsheets. Check out his earlier articles.
A home renovation has similarities to personal finance: You can do it yourself (DIY), you can pay someone to do it for you, or you can do something in between. This last approach has worked well for me���both with renovations and financial matters.
Our home consisted of a three-level townhouse. I decided to renovate it in detail, top to bottom, one floor at a time. I told myself���and my wife���that we were doing it this way to reduce the fiscal pain. But in the end, I just wound up increasing the mental pain. Here���s what I learned from the experience:
1. It���s difficult to find a good contractor. You can ask friends for recommendations, search the internet, check references and interview multiple contractors. But in the end, it���s a crapshoot.
By the end of the third-floor renovation, I had become fed up with the contractor I���d hired. Ditto for the second-floor contractor. Checking references and interviewing can only do so much. In both cases, the guy I interviewed didn���t manage the actual work. Instead, one of his underlings did. Our third contractor���who worked on the first floor���was excellent. But when I subsequently tried to contact him to do further work for us,I found he���d disappeared.
It���s the same with financial advisors. Over the years, I���ve twice hired accountants to prepare our taxes. But after working with them, I noticed they never asked any questions or provided any guidance. I later realized they may not have done the actual work, which was confirmed by a friend who���s a partner at a New York City accounting firm. He informed me that, while he signs the 1040s as ���paid preparer,��� he has his staff actually complete the returns. Another time, I must have spent 10 hours with a Capital One financial advisor preparing a financial plan, only for him to get promoted and never call me back.
2. If you want to get more out of your contractor, try a little DIY. As the renovations continued, I started doing more of the work myself. While I did it mainly to save money, I found that some of it was enjoyable. Watching a light come on after you wired a switch is more satisfying than a hundred spreadsheets.
Each small job made me feel more confident and better able to perform the next, larger job. If I never installed the light switch, there was no way I could have installed the 240-volt service to the dryer. Each job also made me a little more knowledgeable, so that���when I managed my next contractor���I understood a little more of what he was saying and whether it was the best advice for our house.
You may think that you have no skills and therefore DIY is not an option. I felt the same way at one point, but I was determined to try, so I did the demolition on our second bathroom. I���m as good at breaking stuff as the next guy. The demolition led to some rough plumbing, which led to the aforementioned electrical work.
This DIY technique can also help when managing financial advisors. The first year I had to submit a tax return, my preparer made a mistake that I was lucky to catch, so I handled the return myself the next year. That was quite satisfying, enabling me to learn about the tax code, better understand my finances and gain confidence.
This then allowed me to tackle future tax returns, which gradually became more complicated. A few times, I had to hire an accountant, but each time I felt I learned a little more. If I didn���t have this basic understanding of my taxes and therefore my finances, I would have been at a severe disadvantage when hiring each advisor. Also, I���m not sure I could have determined if what they were saying was the correct advice for me.
3. You need some basic understanding of home renovation. After all, how else could you adequately supervise a contractor? And trust me, they all need supervising. One contractor notched out support beams to install some of the plumbing. If I didn���t realize this was an issue, he would have compromised the integrity of the house.
Similarly, my Capital One advisor recommended I sell many of my long-held stocks to conform to the financial plan he created. If I just went along, I would have been hit hard with capital gains taxes.
Now that I���m retired, my tax situation has become simpler���fewer forms, no state income tax, no deductions���which makes me more confident about using the DIY option both for preparing our taxes and managing our finances. Don���t get me wrong: If I need to avail myself of a professional���s services, I will. But as I see it, if you���re making no effort to DIY, you���re wasting an opportunity not just to save money, but to become far smarter about your finances.
Michael Flack blogs at��AfterActionReport.info. He���s a former naval officer and 20-year veteran of the oil and gas industry. Now retired, Mike enjoys traveling, blogging and spreadsheets. Check out his earlier articles.The post Hammered Home appeared first on HumbleDollar.
June 23, 2021
My SPAC Experience
SHAQ AND A-ROD have gotten involved in special purpose acquisition companies, or SPACs, one of the hottest products on Wall Street over the past year. I got there a few years earlier.
In 2018, I invested $5,000 in a SPAC that has since underperformed the market. Still, I got some hands-on experience ahead of the 2020-21 boom. Thinking of buying a SPAC? Based on my investment, here���s what you can expect.
Tom Farley isn���t a household name like Shaq or A-Rod, but he is a star in the field of business���and he was one of my classmates at Georgetown University. I���ve watched his career as he rose from being an investment banker in the late 1990s to become president of the New York Stock Exchange in 2014. In 2018, Farley left the NYSE to lead a SPAC called Far Point Acquisition Corp. After reading Far Point���s prospectus, I purchased 500 shares at the offering price of $10 per share.
The prospectus indicated Far Point would target companies to acquire in the ���financial technology, technology or financial services industry.��� While this approach seemed compelling, I was mainly investing in Far Point based on the track record of its sponsors, including Farley. My view: When investing in a SPAC, you should focus on finding a team of sponsors who can identify an attractive target and successfully complete an acquisition.
As with most other SPACs, Far Point had 24 months to identify an acquisition target. If Far Point���s sponsors couldn���t identify a target during that time, they would return the funds invested to shareholders.
For most of the first two years I held Far Point, there was limited news about the company and there was little change in the company���s stock price. Of the 548 trading days between the company���s IPO (initial public offering) and the date that it completed an acquisition, its stock price traded between $9.50 and $10.50 for 515 of those days, or 94% of the time. The steady price reflected the fact that Far Point was simply holding its IPO proceeds, while it sought out an acquisition target.
Finally, in January 2020, Far Point announced a $2.6 billion deal to merge with a privately held Swiss company, Global Blue. After amendments to the initial terms were made because of the business disruption caused by COVID-19, Far Point shareholders���including me with my 500 shares���voted in August 2020 to approve the deal.
For Far Point stockholders who didn���t want to hold stock in the merged company, they were able to redeem their shares with the company for close to the $10 offering price. Prior to the merger, Far Point stockholders were also free to sell their shares on the open market, just as they could have since the time of the IPO.
The upshot: I���m now a shareholder in a company that processes duty-free shopping payments. On Aug. 31, 2020, the date the merger was completed, the Far Point shares in my brokerage account became shares in Global Blue Group Holding (symbol: GB). My initial investment in a relatively dormant entity has now turned into an investment in an bona fide business that processes duty-free shopping payments. Unlike Far Point���s relatively steady stock price, Global Blue is subject to the ups and downs of the global economy, as illustrated by the trading range of $6.82 to $13.75 since the merger was completed.
While I didn���t set out to buy a duty-free shopping payment processing company in June 2018, I am sticking with it to see how things play out. As I see it, I���m also continuing to invest in Tom Farley, who is the chairman of the new firm.
Kyle McIntosh, CPA, MBA, is a fulltime lecturer at the California Lutheran University School of Management. He turned his career focus to teaching after 23 years working in accounting and finance roles for large corporations. Kyle lives in Southern California with his wife, two children and their overly friendly goldendoodle. His previous articles were What $1,000 Can Buy and��Shifting Gears.
In 2018, I invested $5,000 in a SPAC that has since underperformed the market. Still, I got some hands-on experience ahead of the 2020-21 boom. Thinking of buying a SPAC? Based on my investment, here���s what you can expect.
Tom Farley isn���t a household name like Shaq or A-Rod, but he is a star in the field of business���and he was one of my classmates at Georgetown University. I���ve watched his career as he rose from being an investment banker in the late 1990s to become president of the New York Stock Exchange in 2014. In 2018, Farley left the NYSE to lead a SPAC called Far Point Acquisition Corp. After reading Far Point���s prospectus, I purchased 500 shares at the offering price of $10 per share.
The prospectus indicated Far Point would target companies to acquire in the ���financial technology, technology or financial services industry.��� While this approach seemed compelling, I was mainly investing in Far Point based on the track record of its sponsors, including Farley. My view: When investing in a SPAC, you should focus on finding a team of sponsors who can identify an attractive target and successfully complete an acquisition.
As with most other SPACs, Far Point had 24 months to identify an acquisition target. If Far Point���s sponsors couldn���t identify a target during that time, they would return the funds invested to shareholders.
For most of the first two years I held Far Point, there was limited news about the company and there was little change in the company���s stock price. Of the 548 trading days between the company���s IPO (initial public offering) and the date that it completed an acquisition, its stock price traded between $9.50 and $10.50 for 515 of those days, or 94% of the time. The steady price reflected the fact that Far Point was simply holding its IPO proceeds, while it sought out an acquisition target.
Finally, in January 2020, Far Point announced a $2.6 billion deal to merge with a privately held Swiss company, Global Blue. After amendments to the initial terms were made because of the business disruption caused by COVID-19, Far Point shareholders���including me with my 500 shares���voted in August 2020 to approve the deal.
For Far Point stockholders who didn���t want to hold stock in the merged company, they were able to redeem their shares with the company for close to the $10 offering price. Prior to the merger, Far Point stockholders were also free to sell their shares on the open market, just as they could have since the time of the IPO.
The upshot: I���m now a shareholder in a company that processes duty-free shopping payments. On Aug. 31, 2020, the date the merger was completed, the Far Point shares in my brokerage account became shares in Global Blue Group Holding (symbol: GB). My initial investment in a relatively dormant entity has now turned into an investment in an bona fide business that processes duty-free shopping payments. Unlike Far Point���s relatively steady stock price, Global Blue is subject to the ups and downs of the global economy, as illustrated by the trading range of $6.82 to $13.75 since the merger was completed.
While I didn���t set out to buy a duty-free shopping payment processing company in June 2018, I am sticking with it to see how things play out. As I see it, I���m also continuing to invest in Tom Farley, who is the chairman of the new firm.
Kyle McIntosh, CPA, MBA, is a fulltime lecturer at the California Lutheran University School of Management. He turned his career focus to teaching after 23 years working in accounting and finance roles for large corporations. Kyle lives in Southern California with his wife, two children and their overly friendly goldendoodle. His previous articles were What $1,000 Can Buy and��Shifting Gears.The post My SPAC Experience appeared first on HumbleDollar.
June 22, 2021
Best Buys
MY SPRING CLEANING this year was less eventful than last year's, except I found my fanny pack. I bought it in the early 1990s but misplaced it some years ago. It was so handy for air travel, especially international trips, that I ignored all fashion��worries.
I forgot what I paid for the fanny pack, but it was certainly one of my best buys. Frankly, only a few such purchases stand out. Here���s my list of half-a-dozen similar items. Spoiler alert: The correlation between price and satisfaction seems rather weak.
1. Best car. I���ve owned a dozen cars over the past 30 years, from a compact coupe to a luxury SUV. I have little interest in cars, but I developed a special attachment to one. It���s a 2003 Honda Odyssey that my daughter still drives.
I bought it years ago from a close friend who was moving abroad, and it���s proven to be reliable, comfortable and low maintenance. We drove it to almost all the major national parks in the west, including a few in Canada. Even now, it comes in handy for hauling stuff and occasional airport rides. I recently replaced the transmission, so it should be with us for some years to come.
2. Best financial asset. To jumpstart my wealth building in mid-30s, I had to tighten my belt. The apartment rent was an easy target. With a realtor���s help and my own research, I found a two-bedroom townhouse for sale. It was neither in the most sought-after neighborhood nor aesthetically pleasing, but it was good enough for a recently divorced engineer with a hectic work schedule.
Despite my modest expectations, the quality of life in the townhome was surprisingly pleasant. Amenities like libraries and convenience stores were all within walking distance. My parents were delighted to come over in summer and spend a few months with me. The house was large enough to host occasional get-togethers with close friends. Above all, the financial benefits of this purchase were crystal clear.
My monthly housing payments were only slightly more than my old rent, but my net spending dropped, because the homeowner���s association dues included cable and most utilities. On top of that, part of each mortgage payment increased my home equity, especially with my accelerated principal payments. I sold the townhome after four years and invested the proceeds in stocks. That seemingly unattractive house was arguably the smartest investment I ever made.
3. Best furniture. With my minimalist mindset, I never paid much attention to home furnishings, but my wife did. She bought what she thought would make the house look good. In my humble opinion, which I managed to keep to myself, most were unnecessary. But there was one notable exception.
We needed a new sofa. I wanted something basic and comfy, but my wife fancied a trendy living room set. She dragged me to a furniture warehouse, where we browsed for a few hours. I spotted a lay-flat electric reclining sofa that also met my wife���s d��cor standards. It was pricier than I���d hoped. My wife hurriedly sealed the deal before I changed my mind.
The bulky set arrived a few days later and, since then, has completely transformed our TV watching experience. Viewing movies at home became more enjoyable than��premium��theater seating. My wife had long wanted a TV in the bedroom, which I���d resisted for good reasons. With a sofa that turned into a cozy bed at the press of a button, she doesn���t bring it up anymore.
4. Best appliance. My daughter and I shared a common feeling toward our canister vacuum cleaner. We both hated it. It was clunky and heavy. Attaching the accessories, pulling it around the house and plugging the cord into different wall sockets made cleaning even more of chore. But my wife refused to replace it, pointing out that it worked well.
Our prayers, however, were answered: The cleaner stopped working. I was never so happy to see something break���and I promptly rushed to Costco to get a cordless cleaner. Now, vacuuming the home couldn���t be simpler.
5. Best musical instrument. As a self-taught amateur musician, I love to learn new musical instruments on my own. I usually start with used instruments and get better ones later if I keep at it. Our garage is stuffed with guitars, keyboards, percussion instruments and more. While a few were pricey, my favorite is a basic portable��keyboard bought almost 20 years ago.
It���s the only instrument with a permanent place inside the house. Both my daughter and I play it regularly. With a built-in speaker and prearranged music, it���s perfect for impromptu performances in casual settings. I���ve used the keyboard in live concerts, alongside my other fancier synthesizers, and I still use it for home recording projects.
6. Best travel accessory. My Swiss Army knife, which I���ve mentioned��before, was a nostalgic buy, but its versatility paid off later. With its handy attachments���scissors, nail clipper, pliers, Phillips screwdriver, to name a few���it was indispensable during our vacations, especially camping trips. Sadly, I made the mistake of putting it in my carry-on and had to leave it at airport security. I still haven���t found a worthy replacement.
While I���ve been happy with most of our purchases over the years, only a few rank as exceptional. What turned these few from good to great? It seems they all have three things in common, much like the low-cost diversified funds in my investment portfolio. First, each item served its intended purpose, but didn���t come with bells and whistles for which we had no use. Second, we used them extensively. Finally, each item was low maintenance and involved low overhead.
Sanjib Saha is a software engineer by profession, but he's now transitioning to early retirement. Self-taught in investments, he passed the Series 65 licensing exam as a non-industry candidate. Sanjib is��passionate about raising financial literacy and��enjoys helping others with their finances. Check out his earlier articles.
I forgot what I paid for the fanny pack, but it was certainly one of my best buys. Frankly, only a few such purchases stand out. Here���s my list of half-a-dozen similar items. Spoiler alert: The correlation between price and satisfaction seems rather weak.
1. Best car. I���ve owned a dozen cars over the past 30 years, from a compact coupe to a luxury SUV. I have little interest in cars, but I developed a special attachment to one. It���s a 2003 Honda Odyssey that my daughter still drives.
I bought it years ago from a close friend who was moving abroad, and it���s proven to be reliable, comfortable and low maintenance. We drove it to almost all the major national parks in the west, including a few in Canada. Even now, it comes in handy for hauling stuff and occasional airport rides. I recently replaced the transmission, so it should be with us for some years to come.
2. Best financial asset. To jumpstart my wealth building in mid-30s, I had to tighten my belt. The apartment rent was an easy target. With a realtor���s help and my own research, I found a two-bedroom townhouse for sale. It was neither in the most sought-after neighborhood nor aesthetically pleasing, but it was good enough for a recently divorced engineer with a hectic work schedule.
Despite my modest expectations, the quality of life in the townhome was surprisingly pleasant. Amenities like libraries and convenience stores were all within walking distance. My parents were delighted to come over in summer and spend a few months with me. The house was large enough to host occasional get-togethers with close friends. Above all, the financial benefits of this purchase were crystal clear.
My monthly housing payments were only slightly more than my old rent, but my net spending dropped, because the homeowner���s association dues included cable and most utilities. On top of that, part of each mortgage payment increased my home equity, especially with my accelerated principal payments. I sold the townhome after four years and invested the proceeds in stocks. That seemingly unattractive house was arguably the smartest investment I ever made.
3. Best furniture. With my minimalist mindset, I never paid much attention to home furnishings, but my wife did. She bought what she thought would make the house look good. In my humble opinion, which I managed to keep to myself, most were unnecessary. But there was one notable exception.
We needed a new sofa. I wanted something basic and comfy, but my wife fancied a trendy living room set. She dragged me to a furniture warehouse, where we browsed for a few hours. I spotted a lay-flat electric reclining sofa that also met my wife���s d��cor standards. It was pricier than I���d hoped. My wife hurriedly sealed the deal before I changed my mind.
The bulky set arrived a few days later and, since then, has completely transformed our TV watching experience. Viewing movies at home became more enjoyable than��premium��theater seating. My wife had long wanted a TV in the bedroom, which I���d resisted for good reasons. With a sofa that turned into a cozy bed at the press of a button, she doesn���t bring it up anymore.
4. Best appliance. My daughter and I shared a common feeling toward our canister vacuum cleaner. We both hated it. It was clunky and heavy. Attaching the accessories, pulling it around the house and plugging the cord into different wall sockets made cleaning even more of chore. But my wife refused to replace it, pointing out that it worked well.
Our prayers, however, were answered: The cleaner stopped working. I was never so happy to see something break���and I promptly rushed to Costco to get a cordless cleaner. Now, vacuuming the home couldn���t be simpler.
5. Best musical instrument. As a self-taught amateur musician, I love to learn new musical instruments on my own. I usually start with used instruments and get better ones later if I keep at it. Our garage is stuffed with guitars, keyboards, percussion instruments and more. While a few were pricey, my favorite is a basic portable��keyboard bought almost 20 years ago.
It���s the only instrument with a permanent place inside the house. Both my daughter and I play it regularly. With a built-in speaker and prearranged music, it���s perfect for impromptu performances in casual settings. I���ve used the keyboard in live concerts, alongside my other fancier synthesizers, and I still use it for home recording projects.
6. Best travel accessory. My Swiss Army knife, which I���ve mentioned��before, was a nostalgic buy, but its versatility paid off later. With its handy attachments���scissors, nail clipper, pliers, Phillips screwdriver, to name a few���it was indispensable during our vacations, especially camping trips. Sadly, I made the mistake of putting it in my carry-on and had to leave it at airport security. I still haven���t found a worthy replacement.
While I���ve been happy with most of our purchases over the years, only a few rank as exceptional. What turned these few from good to great? It seems they all have three things in common, much like the low-cost diversified funds in my investment portfolio. First, each item served its intended purpose, but didn���t come with bells and whistles for which we had no use. Second, we used them extensively. Finally, each item was low maintenance and involved low overhead.
Sanjib Saha is a software engineer by profession, but he's now transitioning to early retirement. Self-taught in investments, he passed the Series 65 licensing exam as a non-industry candidate. Sanjib is��passionate about raising financial literacy and��enjoys helping others with their finances. Check out his earlier articles.The post Best Buys appeared first on HumbleDollar.
